Dominance Of The Keynesian Theory Over The Traditional Quantity Theory Of Money

The Keynesian thesis of money and prices is better-quality to the traditional volume thesis
of money for the following grounds.

Keynes’ reformulated volume thesis of money is considered to
be better to the traditional approach, in that he cast-offs the previous outlook that
the association amidst volume of money and prices is straight and comparative. In its
place he institutes an oblique and non-comparative association amidst volume of money
and prices.

In instituting such association, Keynes brought about a transition
from a pure monetary thesis of prices to a monetary thesis of productivity and employment.
As doing so, he incorporates monetary thesis with value thesis, with the thesis of
productivity and employment through the rate of interest.

Actually, the incorporation amidst monetary thesis and value thesis
is performed through the thesis of productivity in which the rate of interest performs
the decisive function.

The Keynesian thesis is thus, superior to the traditional volume
thesis of money for the reason that it does not keep the real and monetary segments
to the fiscal system into two diverse cubicles with “no doors or windows amidst
the thesis of value and the thesis of money and prices.”

Yet again the traditional volume thesis depends on the non-factual
hypothesis of full employment of resources. Under this hypothesis a given augment in
the volume of money always tends to a rational augment in the price level. Keynes on
the other hand, assumes that full employment is an exemption.

Hence, as long as there is redundancy, productivity and employment
will vary in the same ration as the volume of money, however there will be no variation
in prices. When there is full employment, prices will vary in the same ration as the
volume of money.

Thus the Keynesian scrutiny is supreme to the traditional examination
for the reason that it examines the association amidst volume of money and prices both
under redundancy and full employment stipulations.

Also, the Keynesian thesis is supreme to the traditional volume thesis
of money in that it highlights vital strategy insinuations. The traditional thesis
assumes that every augment in the volume of money tends to inflation. Keynes on the
other hand, institutes, that so long as there in redundancy, the rise in prices is
gradual and there is no danger of inflation.

It is only when the fiscal system reaches the level of full employment
that the rise on prices is inflationary with every hike in the volume of money. thus “this
approach has the virtue of highlighting that the objectives of full employment and
price stability may be intrinsically incompatible.”

Criticisms of Keynes Thesis of Money and Prices

Keynes views on money and prices have been criticised by the monetarists on the following
causes:

Direct Association

Stable Demand for Money

Nature of Money and

Effect of Money

Direct Association

Keynes misguidedly took prices as unchangeable and that the effect of money materializes
in his scrutiny in terms of quantity of goods exchanged somewhat than their average
prices.

That is why Keynes adopted an indirect mechanism through bond prices, interest rates
and investment of the effects of fiscal variations on monetary performance. But the
actual effects of monetary variations are direct some what than meandering.

Stable Demand for Money

Keynes believed that monetary variations are largely absorbed by variations in the demand
for money. but Friedman has depicted on the basis of his pragmatic examines that the
demand for money is hugely invariable.

Nature of Money

Keynes was unsuccessful in understanding the true nature of money. He assumed that money
could be exchanged for bonds only. Actually, money can be exchanged for many diverse
kinds of like wealth like bonds, physical assets, securities human wealth etc.

Effect of Money

Because Keynes wrote for a depression period, this led him to conclude that money had
little effect on earnings. According to Friedman, it was the retrenchment of money
that impetuous the depression.

It was thus, incorrect on the part of Keynes to argue that money had little effect on
earnings. money does affect national earnings.

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